Hopes of an imminent recovery for the recession-hit UK economy were dashed today by figures showing it is in deeper trouble than was thought.
Figures from the Office for National Statistics showed that GDP shrank at a rate of 0.8% between April and June, far faster than the 0.3% economists had been expecting.
This fifth successive quarter of contraction means that the economy has shrunk 5.7% since the recession began in the second quarter of 2008.
• WHAT THE ECONOMISTS SAY
The records now show that this is twice as deep as the early 1990s recession and approaching the level of the slump seen in the early 1980s. Sterling dropped by a cent against both the dollar and euro on the news to $1.6450 and €1.1577 respectively.
The Government has forecast the economy to contract by 3.25-3.75%, but GDP has already shrunk by 3.16% this year, and the economy is now on course to shrink by 4.5% over the year.
Although the rate of decline slowed significantly from the drastic 2.4% fall in the first quarter, the preliminary ONS data - which could yet be revised - deliver a blow to optimism that had begun to emerge on the prospects for recovery.
Vicky Redwood, chief economist at Capital Economics, did not mince her words, calling the figures ‘pretty dreadful’ and ‘dashing any hopes that the UK had pulled out of recession in the second quarter. It confirms it’s going to be a pretty hard task to get the UK economy back on track’.
A 0.7% decline in business services and finance was the biggest driver behind the 0.8% fall. Ross Walker, UK economist at RBS Financial Markets, said the poor showing from the services sector bodes ill for the wider economy.
‘Bear in mind the [recent positive purchasing managers indices], which are normally pretty leading, pointed to growth in May and June,’ he said. ‘You would have thought there would have been some feed-through.
‘It casts doubt on whether we will actually see growth in Q3 … it’s worrying. This suggests that full year GDP could be down 4.5% or possibly even more, which would be truly awful.’
The stock market took the figures in its stride, with the FTSE 100 barely registering a wobble on the tenth day of its winning streak - it was last 30.4 points up at 4,590.2.
David Buik of BGC Partners said market watchers and traders were more sanguine about the GDP data: ‘I do not understand where that estimated number of -0.3% for second-quarter GDP [came from]! I assume it was from a tombola! There have been no signs that the economy has improved that dramatically from -2.4% to 0.3%. -0.8% seems more than fair in the circumstances.’
One analyst even cast doubt on the figures. Jamie Dannhauser of Lombard Street Research said, ‘These numbers are hard to reconcile with the slew of expenditure information available to us. Unless it transpires that inventories were slashed even faster than in Q1, there is likely to be an upward revision to the level of real GDP in the second quarter.’
This latest damning evidence on the state of the economy could see the Bank of England’s monetary policy committee resuming its quantitative easing scheme next month to inject life into the economy.
This month it surprised analysts by declining to use the remaining £25bn of £150bn made available to it by the Treasury for the programme, the efficacy of which is still a matter of debate.
Alan Clarke of BNP Paribas said: ‘Speculation on whether the Bank of England would continue its QE program has aired towards the likelihood it will pause. This data means it is all open again.’
Construction was particularly badly hit, with the sector shrinking at a record annual rate, the ONS said. Output fell 2.2% over the quarter and is now 14.7% below the same period last year, the biggest fall since records began in 1948.
Production industry output - such as construction, mining and manufacturing - fell 0.7% between April and June, the ONS added.
The news helped instantly shave nearly 25 points from the FTSE 100, although the index, up 28.61 at 4,588.41 at 10.40am, remained on course for a 10th day of gains.
Tags: uk economy, UK Finance
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